by Tim Carkin, CAIA, CMT
Senior Vice President
Santa Claus came in the waning days of December and brought his namesake rally. But as the calendar turned, Santa left, and the markets started the year with a stumble. December and January are prime market watching months as one year ends and another begins. The Stock Trader’s Almanac has three indicators predicting the direction of the market for the year.
First is the “Santa Claus Rally” which we highlighted two weeks ago. On average, the Santa Claus Rally is fueled by investors buying into year-end on low trading volumes, so they aren’t perceived to be “sitting on cash.” For some institutional managers, there is also an urge to bolster year-end reports with winning stocks. This 2021 rally saw the S&P 500 gain 1.4% to end the year.
The second is the “first week in January” rule where, when the market is up the first five trading days of the year, we can expect the market to finish the year up as well. This rule in the post-WWII era has been accurate over 70% of the time. We have reached the end of the “first week” and we’ve seen heavy selling in the winners from 2021 and buying of the losers. This has been a significant factor in the “down days” and volatility we’ve experienced this week as some of the largest names in the indices were also winners in 2021. According to the second rule, this wouldn’t normally bode well for the markets, but its predictive ability falls to less than 50% in years like this one where there is a mid-term election.
Lastly, there is the “as goes January, so goes the market” theory, also known as the “January Barometer.” The Stock Trader’s Almanac postulates that if stock market returns are up in January, the market will finish the year up as well. In the post-war years this has proven true 85% of the time. We will have to wait and see how the month unfolds.
Interestingly, when combined, these metrics have proven quite predictive. When all three are positive, the stock markets end the year up 90% of the time. That said, Ferguson Wellman doesn’t make investment decisions based on the Stock Trader’s Almanac; rather we focus on market fundamentals, corporate earnings and the economy, all of which are on good footing. When considering January’s returns, we are looking to see investors reactions to the Omicron variant surge and how that sets the tone for any future disruptions we see in the coming year.
U.S. Jobs Gain Less Than Expected
In December, the U.S. economy added 199,000 jobs, less than the expected 251,000. The non-farm payroll miss will probably be considered “disappointing” as it was paired with a similar but smaller increase in labor force participation. This implies that there is a mismatch in jobs available and those able to fill them. This report also pushed the unemployment rate to 3.9%. That means more new jobs added last year than any year on record. . . but still 3.6 million jobs short of pre-pandemic levels.
The minutes for the most recent Fed meeting were released this week and were more hawkish than anticipated. The Fed has accelerated the taper of asset purchases and dropped the characterization of inflation as "transitory.” The markets are pricing in three short-term interest rate increases in 2022 with the first one possibly as early as the March Fed Meeting.
Takeaways for the Week
The Santa Claus Rally left markets with a lump of coal to start January, with the S&P 500 losing 1.7%
The Fed has become more hawkish in the pace of tapering asset purchases and communication around rate increases in 2022